The 9% Resin Increase on a Molded Housing

Step 1 - Should-cost build-up

Resin: 0.185 kg × $5.60/kg = $1.036; at 4% unrecoverable scrap, ÷ 0.96 = $1.079/part

Machine: 24 s cycle ÷ 2 cavities = 12 s/part → 3,600 ÷ 12 = 300 parts/hour. At $150/hour → $0.500/part

Other: secondary/assembly $0.300 + packaging $0.070 + freight $0.100 + tooling amortization $0.100 = $0.570/part

Subtotal: 1.079 + 0.500 + 0.570 = $2.149/part

SG&A plus margin at 13%: $2.149 × 1.13 = $2.428/part should-cost

Step 2 - Compare to the quoted price

$2.85 ÷ $2.428 = 1.174. The supplier's price is 17.4% above should-cost ($0.422/part, roughly $506,000 a year). Either the supplier has a cost element not visible in the model, or the price already carries a cushion. That must be resolved before any adjustment is discussed.

Step 3 - Test the claim

• "Resin is 52% of the price." At should-cost, resin is $1.079 ÷ $2.428 = 44.4%. On the quoted price it is 1.079 ÷ 2.85 = 37.9%. The 52% figure implies a resin content of $1.48/part (52% × $2.85), which is 37% more resin than the part physically contains.
• "Resin is up 22%." The buyer's price service shows this specific grade up 11%. A 22% move may be true of a broader index or a different grade, but the contract should follow the grade actually consumed.

Step 4 - Supportable increase

Resin pass-through = $1.079 × 0.11 = $0.119/part, which is 4.9% of should-cost or 4.2% of the current price. Against the supplier's request of 9% ($0.257/part), the overstatement is roughly $0.137/part × 1.2M = $164,000 a year.

Conclusion: a resin adjustment of about $0.12/part is supportable on the should-cost base. But the base is 17.4% high. Applying an index to an inflated base compounds the problem.

Recommended position: agree the index mechanism and the 11% figure in principle, but reset the base to should-cost (or require the supplier to open the books and show what the model is missing) before the adjustment is applied. Indexing a wrong number produces a wrong number with a defensible-looking formula attached.

Step 1 - Landed cost, offshore

• FOB price: $2.4200
• Duty at 6.5% ad valorem on FOB: $2.42 × 0.065 = $0.1573
• Ocean freight and insurance: $0.1100
• Source inspection: $0.0300
• Landed and inspected: $2.7173/part

Domestic at $2.85 is already only $0.133/part ahead. The offshore option does not have the cost advantage it appears to have at the FOB quote.

Step 2 - Pipeline inventory carrying cost

Offshore requires 8 extra weeks of supply in the pipeline versus domestic.

• Extra inventory: (8 ÷ 52) × 1,200,000 = 184,615 parts
• Value at landed cost: 184,615 × $2.7173 = $501,700
• Carrying cost at 22%/yr: $501,700 × 0.22 = $110,374/yr
• Per part: $110,374 ÷ 1,200,000 = $0.0920

Step 3 - Total cost of ownership

$2.7173 + $0.0920 = $2.8093/part

Against domestic at $2.8500/part. The advantage is $0.041/part, about $48,800 a year - roughly 1.4% of spend, on an estimate that rests on several assumptions.

Step 4 - What the comparison does not capture

1. Forecast error. Demand historically varies ±18%. On 184,615 parts of pipeline, an 18% swing is ~33,000 parts, and the portion that becomes excess or obsolete at $2.72 is real money. A single bad quarter consumes the entire annual saving.
2. Expedite and recovery cost. At 11 weeks, a quality problem cannot be recovered by air freight at anything close to $0.04/part.
3. Quality. No PPM data is given for the offshore source; if it runs worse than the domestic incumbent, inspection cost and returns rise.
4. Currency and duty volatility. A 6.5% duty is 6.5% of the landed calculation; a tariff change or a currency move of 5% wipes out a 1.4% saving.
5. Working capital. The pipeline is a cash commitment, not just a carrying cost.

Conclusion: at 1.4% of spend, the offshore case is not a sourcing decision, it is a bet. It becomes viable if the supplier shortens lead time, holds consignment stock at a regional hub, or moves to a delivered-duty-paid basis that transfers the pipeline risk. Otherwise the domestic incumbent is the rational choice even at a higher piece price.

Opening position

"We accept that resin costs have risen and we are prepared to share that movement on a documented, indexed basis. We do not accept a 9% increase, and we do not accept the cost model underlying it."

Sequence - base first, then index

1. Challenge the base. Present the should-cost ($2.428) against the quoted $2.85 and ask the supplier to explain the $0.422 gap. Give a specific window (ten business days) and a specific format (cost breakdown by element, not a narrative). Silence or a refusal to open the model is itself information.
2. Correct the claim. Show that resin is 44.4% of should-cost, not 52% of price, and that the relevant grade moved 11%, not 22%. Use the buyer's independent price service so the conversation is about data, not assertions.
3. Concede the real number. Offer $0.119/part as a documented pass-through - about 4.2% of price - contingent on the base being reset or adequately explained.

What to concede

• A genuine, indexed pass-through on the resin element only, quarterly, using a named published index for the specific grade.
• Symmetry: the mechanism reduces price when the index falls. This is the single most valuable term in the package and is usually the hardest to get.
• Term: offer 24 months in exchange for the index mechanism and the base reset. Term is cheap; price is not.

What to require in return

1. Open-book cost model refreshed annually, with an audit right.
2. Dead band (e.g., movements under 3% are absorbed) to eliminate administrative churn.
3. A productivity commitment of 2% a year on the conversion element (machine, secondary, packaging), which is where the supplier actually controls cost.
4. A cap on any single adjustment (e.g., 6% of price) and a floor.
5. Price reduction if volume exceeds agreed bands.

Walk-away

The maximum acceptable outcome is the indexed adjustment applied to a base no more than 5% above should-cost. Above that, the offshore option becomes live at roughly parity - and the supplier should know that a valid second source exists, without being told the analysis is thin.